JUNE 2023

VOlUME 06 ISSUE 06 JUNE 2023
The IPO Underpricing and Market Liquidity after Reform on Chi-Next Board
Wei Hua
School of Finance, Nanjing Audit University, Nanjing, Jiangsu Province, China
DOI : https://doi.org/10.47191/ijsshr/v6-i6-26

Google Scholar Download Pdf
ABSTRACT

This essay examines market liquidity and underpricing of initial public offerings (IPOs) in the wake of the Chi- Next board's financial reform in June 2020. The results show that IPO underpricing has grown and market liquidity has improved since the reform. The channel by which the reform affects IPO underpricing and market liquidity can be explained by investor sentiment. The impact of the reform on underpricing and market liquidity can also be explained by other firm-level characteristics, such as leverage and firm life cycle.

KEYWORDS:

Investor sentiment; IPO underpricing; IPO reform; Market liquidity

REFERENCES

1) Aggarwal, R., Bhagat, S., & Rangan, S. (2009). The impact of fundamentals on IPO valuation. Financial Management, 38(2), pp. 253-284.

2) Aksu, M., & Espahbodi, H. (2016). The impact of IFRS adoption and corporate governance principles on transparency and disclosure: the case of Borsa Istanbul. Emerging Markets Finance and Trade, 52(4), pp. 1013-1028.

3) Akyol, A. C., Cooper, T., Meoli, M., & Vismara, S. (2014). Do regulatory changes affect the underpricing of European IPOs?. Journal of Banking & Finance, 45, pp. 43-58

4) Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects. Journal of financial markets, 5(1), pp. 31-56.

5) Baamir, A. Y. (2008). Issues of Transparency and Disclosure in the Saudi: Stock Market. Arab Law Quarterly, 22(1), pp. 63-87.

6) Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross‐section of stock returns. The journal of Finance, 61(4), pp. 1645-1680.

7) Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of economic perspectives, 21(2), pp. 129-152.

8) Barberis, N., & Huang, M. (2008). Stocks as lotteries: The implications of probability weighting for security prices. American Economic Review, 98(5), pp. 2066-2100

9) Beck, T., & Levine, R. (2004). Stock markets, banks, and growth: Panel evidence. Journal of Banking & Finance, 28(3), pp. 423-442.

10) Bekaert, G., & Harvey, C. R. (2000). Foreign speculators and emerging equity markets. The journal of finance, 55(2), pp. 565-613.

11) Bekaert, G., & Harvey, C. R. (2003). Emerging markets finance. Journal of empirical finance, 10(1-2), pp. 3-55.

12) Beltratti, A., Bortolotti, B., & Caccavaio, M. (2016). Stock market efficiency in China: evidence from the split-share reform. The Quarterly Review of Economics and Finance, 60, pp. 125-137.

13) Booth, J. R., & Chua, L. (1996). Ownership dispersion, costly information, and IPO underpricing. Journal of Financial Economics, 41(2), pp. 291-310.

14) Boulton, T. J., Smart, S. B., & Zutter, C. J. (2010). IPO underpricing and international corporate governance. Journal of International Business Studies, 41(2), pp. 206-222.

15) Brennan, M.J., Franks, J., 1997. Underpricing, ownership and control in initial public offerings of equity securities in the U.K. Journal of Financial Economics 45, pp. 391–413.

16) Chan, K., Wang, J., & Wei, K. J. (2004). Underpricing and long-term performance of IPOs in China. Journal of Corporate Finance, 10(3), pp. 409-430.

17) Chen, H., Chong, T. T. L., & She, Y. (2014). A principal component approach to measuring investor sentiment in China. Quantitative Finance, 14(4), pp. 573-579.

18) Chen, Y., Goyal, A., & Zolotoy, L. (2022). Global board reforms and the pricing of IPOs. Journal of Financial and Quantitative Analysis, 57(6), pp. 2412-2443.

19) Cheung, Y. L., Ouyang, Z., & Weiqiang, T. A. N. (2009). How regulatory changes affect IPO underpricing in China. China Economic Review, 20(4), pp. 692-702.

20) Cornelli, F., Goldreich, D., & Ljungqvist, A. (2006). Investor sentiment and pre‐IPO markets. The journal of finance, 61(3), pp. 1187-1216.

21) Darmadi, S., & Gunawan, R. (2013). Underpricing, board structure, and ownership: An empirical examination of Indonesian IPO firms. Managerial Finance, 39(2), pp. 181-200.

22) Debata, B., Dash, S. R., & Mahakud, J. (2021). Stock market liquidity: Implication of local and global investor sentiment. Journal of Public Affairs, 21(3), e2231.

23) Derrien, F. (2005). IPO pricing in "hot" market conditions: who leaves money on the table?. The journal of finance, 60(1), pp. 487-521.

24) Dorn, D. (2009). Does sentiment drive the retail demand for IPOs?. Journal of Financial and Quantitative Analysis, 44(1), pp. 85-108.

25) Gauvin, M., & Power, G. J. (2019). The effect of size offering and leverage on IPO underpricing. International Journal of Managerial and Financial Accounting, 11(3-4), pp. 222-237.

26) Gerace, D., Liu, Q., Tian, G. G., & Zheng, W. (2015). Call Auction Transparency and Market Liquidity: Evidence from China. International Review of Finance, 15(2), pp. 223-255.

27) Guo, H., Brooks, R., & Shami, R. (2010). Detecting hot and cold cycles using a Markov regime switching model— Evidence from the Chinese A-share IPO market. International Review of Economics & Finance, 19(2), pp. 196-210.

28) Habib, A., & Hasan, M. M. (2019). Corporate life cycle research in accounting, finance and corporate governance: A survey, and directions for future research. International Review of Financial Analysis, 61, pp. 188-201.

29) Habib, M. A., & Ljungqvist, A. P. (2001). Underpricing and entrepreneurial wealth losses in IPOs: Theory and evidence. The Review of Financial Studies, 14(2), pp. 433-458.

30) Han, X., & Li, Y. (2017). Can investor sentiment be a momentum time-series predictor? Evidence from China. Journal of Empirical Finance, 42, pp. 212-239.

31) Henry, P. B. (2000). Do stock market liberalizations cause investment booms?. Journal of Financial Economics, 58(1-2), pp. 301-334. 32) Ibbotson, R. G. (1975). Price performance of common stock new issues. Journal of financial economics, 2(3), pp. 235- 272.

33) Jain, P. K., & Rezaee, Z. (2006). The Sarbanes‐Oxley Act of 2002 and capital‐market behavior: Early evidence. Contemporary accounting research, 23(3), pp. 629-654.

34) Katti, S., & Phani, B. V. (2016). Underpricing of initial public offerings: A literature review. Universal Journal of Accounting and Finance, 4(2), pp. 35-52.

35) Keloharju, M.(1993). The winner's curse, legal liability, and the long-run price performance of initial public offerings in Finland. Journal of Financial Economics, 34, pp. 251-277.

36) Khurshed, A., Tong, Y., & Wang, M. (2018). Split-share structure reform and the underpricing of Chinese initial public offerings. The European Journal of Finance, 24(16), pp. 1485-1505.

37) Lee, C. M., Shleifer, A., & Thaler, R. H. (1991). Investor sentiment and the closed‐end fund puzzle. The journal of finance, 46(1), pp. 75-109.

38) Li, X., & Zhang, B. (2011). Has split share structure reform improved the efficiency of the Chinese stock market?. Applied Economics Letters, 18(11), pp. 1061-1064.

39) Lin, C., Ho, C., & Fang, V. (2005). Australian consumer sentiment and sector return. In European Financial Management Association 2005 Annual Meetings (Vol. 29).

40) Liu, S. (2015). Investor sentiment and stock market liquidity. Journal of Behavioral Finance, 16(1), pp. 51-67.

41) Ljungqvist, A., & Wilhelm Jr, W. J. (2005). Does prospect theory explain IPO market behavior?. The Journal of Finance, 60(4), pp. 1759-1790.

42) Loughran, T., & Ritter, J. R. (2002). Why don't issuers get upset about leaving money on the table in IPOs?. The Review of Financial Studies, 15(2), pp. 413-444.

43) Lowry, M., & Shu, S. (2002). Litigation risk and IPO underpricing. Journal of Financial Economics, 65(3), pp. 309-335.

44) Maug, E. (2001). Ownership structure and the life-cycle of the firm: A theory of the decision to go public. Review of Finance, 5(3), pp. 167-200.

45) Oreski, T., & Xu, J. (2020). Product Life-Cycle and Initial Public Offerings. Available at SSRN 3910034.

46) Pástor, Ľ., & Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. Journal of Political economy, 111(3), pp. 642-685.

47) Ritter, J. R. (1984). The" hot issue" market of 1980. Journal of business, 57(2), pp. 215-240.

48) Rock, K. (1986). Why new issues are underpriced. Journal of financial economics, 15(1-2), pp. 187-212.

49) Schenone, C. (2004). The effect of banking relationships on the firm's IPO underpricing. The Journal of Finance, 59(6), pp. 2903-2958.

50) Shi, C. (2005). Competition in China's Securities Market: Reform of Current Regulatory System. Loy. U. Chi. Int'l L. Rev., 3, pp. 213.

51) Su, D. (2004). Leverage, insider ownership, and the underpricing of IPOs in China. Journal of International Financial Markets, Institutions and Money, 14(1), pp. 37-54.

52) Tadesse, S. A. (2005). Stock markets liquidity, corporate governance and small firms. Corporate Governance and Small Firms (June 2005). William Davidson Institute Working Paper, (883).

53) Tinic, S. M. (1988). Anatomy of initial public offerings of common stock. The journal of finance, 43(4), pp. 789-822.

54) Wang, Y., & Yao, J. (2021). Investor sentiment, issuance cost, and IPO underpricing: an empirical analysis of Shanghai Stock Exchange A-shares. Applied Economics Letters, 28(6), pp. 508-511.

55) Welch, I. (1992). Sequential sales, learning, and cascades. The Journal of Finance, 47(2), pp. 695-732.

56) Yao, J., Ma, C., & He, W. P. (2014). Investor herding behaviour of Chinese stock market. International Review of Economics & Finance, 29, pp. 12-29.

57) Zingales, L. (1995). Insider ownership and the decision to go public. The review of economic studies, 62(3), pp. 425-448.

58) Zou, G., Cheng, Q., Chen, W., & Meng, J. G. (2020). What causes the IPO underpricing? New evidence from China’s SME market. Applied Economics, 52(23), pp. 2493-2507.

VOlUME 06 ISSUE 06 JUNE 2023

Indexed In

Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar Avatar